informed investment decisions. However, the extensive disclosure requirements proposed in
BICE extend far beyond useful and meaningful point of sale disclosures. They overlap and
potentially conflict with existing legally required disclosures (to the extent a projection of future
return is required to provide the disclosure, or the format of the disclosure for securities differs
from SEC requirements), do not take into account important distinctions between different types
of products and services, would require systems capabilities that do not exist today, and would
take vastly more time and money to build than estimated in the Proposal. While the Department
assumes that only 100 hours will be required to build the required disclosures, our initial IT
estimates suggest that it would likely take MassMutual’s insurance and retirement businesses
collectively over 250,000 IT hours and cost between $25 and $35 million dollars to implement.
Put another way, our estimated work effort would be 2,500 times greater than predicted by the
Department in its cost benefit analysis.

Recommended Changes

In lieu of the disclosures and website requirements, we propose an alternative disclosure
approach that focuses on getting critical information into the hands of retirement investors no
later than the point of sale. This disclosure would include (1) the direct compensation paid to the
adviser in the form of a percent of premiums paid or purchase amount, (2) a narrative description
of the indirect compensation received, and (3) a “cigarette type warning” that would highlight
existing disclosures contained in product prospectuses that detail the total cost of variable
annuities and mutual funds.

Comment: The Data Request Requirement Must Be Eliminated.

The data request requirement, and the Department’s unfettered discretion to disclose proprietary
information received through such a request even if all legal standards have been satisfied,
exceeds any reasonable need of the exemption (given the Department's statutory powers of
investigation) and appropriate administrative practice. Given current concerns about
uncontrolled government access to private information, recent news headlines on the ability of
the government to protect client data, and the lack of a statutory basis, this requirement must be
eliminated.

Requested Changes

The data request requirement must be eliminated.

Item V. The Proposed Transitional Periods are Inadequate

Comment: The Proposal Must Allow At Least a 36 Month Transition Period and Fully
Grandfather Existing Arrangements.

We have a number of concerns regarding the transition period contemplated by the Department,
as well as the “grandfather” provision in BICE related to existing arrangements.

20


aretha otin-which result in recommendations that are
contrary to the Best Interest of the Retirement Investor.

3. Provide additional clarification on this issue through the addition of an example in the
preamble or by other means.

Comment: The Impartial Conduct Standards Must Not Preclude Variations in
Compensation among Product Types and Specific Product Offerings.

In the context of a legal standard that is intended to cause retirement advisers to ignore sales
compensation when providing advice to retirement investors, the Proposal, and BICE in
particular, demands that advisers give obsessive attention to such compensation in their
compliance procedures. This goes too far. The competitive marketplace has, for many years,
used compensation structures for insurance agents and brokers, and for registered representatives
of broker-dealers, which reflect the differences in products and investments, as well as the nature
and extent of services required to sell each of those types of products. It would be incorrect to
assume that considerations, such as time, effort, supervisory requirements, training and
education, and so on, were not already reflected in the compensation structures.

Furthermore, the Proposal already has adequate requirements and conditions to properly manage
the risks that the Department is concerned about. First, the fiduciary advice definition, and both
“sales” exemptions (PTE 84-24 and BICE), require that the fiduciary adviser make prudent
recommendations to the plan, participant and IRA owner, taking into account the needs of the
investor. As noted earlier, the preambles to both exemptions explain that the standard of care
also requires that the fiduciary adviser put the interests of the investor ahead of his own. The
failure to satisfy those standards of care would, in most cases, result in a breach for which
damages are available. And, in all cases, it would result in a prohibited transaction for which the
investor could recover the compensation paid to the fiduciary adviser. As a second reason, the
compensation of the fiduciary adviser would be required to be reasonable. If the amounts paid to
the adviser exceeded that amount, the excess could be recouped by the investor. As a result, the
potential for self-serving advice which could result in imprudent recommendations or which
could result in excessive compensation for the fiduciary adviser are already fully regulated,
without the need for further “management” of the compensation of the adviser.

The BICE preamble suggests that different levels of compensation by product type could be
permissible under the impartial conduct standards if supported by differences in the work,
training and expertise required to support the product, but does not articulate that position in a
reliable way. Nor does the preamble clearly address the possibility that different compensation
levels within a particular product type could be squared with the best interest standard. Product
manufacturers — annuity issuers, mutual fund sponsors and other product managers — have
entirely legitimate business reasons to offer higher levels of sales compensation for particular
products, for example, to promote sales to sufficient numbers of purchasers to reach the actuarial
law of large numbers or scale in investments and expenses. And ERISA does not supersede the
antitrust laws; product manufacturers compete on sales compensation as well as product terms.

It is entirely possible that a product with an above-average level of sales compensation will serve
the best interests of a plan participant or IRA owner, but without further clarification the

14


Please do not hesitate te contact us with any comments or questions, or if farther information
would be helpful,

Respectfully submitted,

John Li, Deitelbaum Kevin 0. Finnegan

Senior Vice President & Senior Vice Presidont &
Deputy General Counsel - Deputy General Counsel ~
U.S. Insuranee Group Retirement Services Division

24


model for advice that does not fit. Sales activities are by definition at arm’s length. A core
function of all financial regulation in the United States is to properly recognize and implement
the distinction between sales activity and impartial financial advice.

DOL recognized these distinct models in the 2010 version of the proposed regulation by
providing an exclusion from fiduciary investment advice for those selling products when there is
no reasonable expectation of a fiduciary relationship.’ We believe that the DOL properly
preserved this distinction in the 2010 proposal by permitting sales activities to remain non-
fiduciary in nature, with clear disclosure of potential conflicts. While the Department partially
retained this concept in the Proposal through its large plan “carve-out” that permits sales
activities to plans with more than 100 participants or more than $100 million in assets, this
exclusion should not be limited to large plans. The Department should expand this carve-out to
include sales to IRAs and retirement plans regardless of plan size, with reasonable and clear
disclosures.

The rationale articulated by the Department in the Proposal for only providing a carve-out for
large plans is not valid as the size of the plan is not an acceptable proxy for sophistication. Small
plan sponsors and IRA owners understand the difference between sales and advice; these
concepts are not foreign. Indeed, even if financial sophistication were required to understand the
difference between sales and advice, a fiduciary to a plan with more than 100 participants or
$100 million in assets may know less about investing than a small plan fiduciary or IRA owner
who is an expert investor — the large plan carve-out merely discriminates against small plans
and individuals by denying them choices in the marketplace that are available to large plans.

And all plans are required under ERISA to bring financial expertise to investment decision
making — by engaging a third party expert if the plan fiduciaries themselves are not sufficiently
expert — which means that intermediaries engaged in a sales transaction can appropriately deal at
arm’s length with the plan (or its third party expert) without risk of “conflicted” advice.

Proprietary Products. This gap in the Proposal is most clearly illustrated by the sale of
proprietary products. Like many financial service providers, MassMutual makes available to its
customers investment and insurance products developed and managed by MassMutual. These
proprietary products, and the conduct of our sales staff who market them, are overseen by a
variety of state and federal regulatory and enforcement agencies. These agencies and the rules
they enforce ensure that our employees, agents and affiliates accurately represent the products, °

3 See 715 Fed. Reg, 65263 (Oct. 22, 2010).
4 See, e.g., 29 CFR. § 2509.95-1(c)(6)

5 There are a series of state insurance laws and regulations that, among other things, prohibit any misrepresentations
related to an insurance policy. Section 4 of the National Association of Insurance Commissioners (“NAIC”) Model
Unfair Trade Practices Act makes it an unfair trade practice if anyone “misrepresents the benefits, advantages,
conditions or terms of any policy.” This NAIC model act serves as the template for nearly all the state definitions of
unfair trade practices. With respect to annuity products, many states have adopted suitability regulations that require
that the insurance company or its agent have a reasonable basis to believe that the consumer has been “informed of
the various features of the annuity.” See Section 6 of the NAIC Suitability in Annuity Transactions Model
Regulation (“Suitability Regulation”). In addition, to the extent that the products being provided are securities such
as variable annuities or mutual funds, there are numerous statutes and regulations that impose disclosure obligations
on the issuers of such securities, as well as any securities intermediary involved in the sale of those products.

Issuers of securities are required to disclose all material facts, and refrain from omitting any material information
that would be viewed as important to a reasonable investor. Broker-dealers selling securities are subject to a duty of

5


First, eight months is simply not enough time to effect changes of the magnitude required by the
Proposal and BICE. The disclosure provisions alone will require substantial modification of
internal systems at a significant cost that the Department has not adequately estimated. When
the Department made similar changes in connection with the section 408(b)(2) disclosures,
service providers had substantially more time in which to reform their information systems; eight
months from the final rule is simply impossible at any reasonable expense (and likely impossible
even at any unreasonable expense). As these costs will be borne ultimately by the participants
and IRA owners, the Department should provide a reasonable transition period of no less than 36
months.

Second, the Department should apply the new rule only to new agreements reached after its
effective date. To do otherwise, runs contrary to normal expectations that the contractual
provisions lawfully reached between private parties will be honored until their expiration. For
example, an agreement in which a front-end load has been paid for services should not be
changed in mid-contract for a completely different compensation model.

The BICE grandfather provision incents advisers to refrain from providing any new advice; this
is not in the best interest of plans, participants or IRA owners. Additionally, the provision
applies only to assets that are eligible for BICE. The inequitable result is that advice provided in
connection with assets not eligible for BICE has no grandfather period at all. And more
generally, the time and expense for the financial services industries to reconsider and, where
required, restructure every one of the millions of relationships they currently have with
retirement investors exceeds any reasonable regulatory demand.

Recommended Changes

All aspects of the Proposal should take effect at least 36 months after publication in the Federal
Register. Existing customer arrangements should be fully grandfathered.

Item VI. Streamlined Exemption Requires Additional Focus

Comment: The Proposal Does Not Provide a Basis for Adopting a “Streamlined”
Exemption.

The Department has asked for comments to support a “streamlined” exemption from the BICE
for “low cost investments.” No hint is given as to what the conditions may be for this exemption
or the justification for what would amount to a free pass to fiduciaries who only recommend
specific investments favored by the Department.'* We have deep conceptual concerns about
such an exemption. It sends a strong message that cost is the only consideration in evaluating the
merit of investments; we are alarmed by the Department’s leap that low cost equates to “minimal
risk” of abuse. The inevitable result of such an exemption, of course, is that the Department’s
favored (passive) investments would end up being the only investments available to small
retirement plans and accounts.

'8 The Department has asked for input as to what conditions, ifany, should be required other than low cost.

21


annually due to flawed investment decision making that could be improved with greater
access to professional investment services. *>

e Finally, these participants and IRA owners face the challenge of making their retirement
savings last for increasingly longer lifespans, and would be very well served by greater
professional assistance with decumulation strategies and products.TM*

These fundamental issues in the retirement system — the coverage and savings gaps and, in the
increasingly prevalent defined contribution environment, deficiencies in investment and
decumulation decision making by participants and IRA owners — dwarf the perceived “conflicted
advice” problem (which the Administration speculates is on the magnitude of a $17 billion issue
annually”® but which has not been adequately established by reliable evidence). These more
fundamental issues would be improved by public policy that enhances the availability of
professional investment services. Retirement investors who work with professional advisers have
larger retirement savings than those who do not.”* It is therefore essential that, if the Department
determines to proceed, the Proposal be tightened and sharpened to address important and
documented concerns, and no more. And while this would be no one’s preference, if an
additional round of notice and comment is necessary to perfect a Proposal of this scope and
consequence, the Department should give serious consideration to that additional step.

We very much appreciate the opportunity to comment on and discuss these important issues with
the Department. As noted at the outset, the best interest of our customers is at the very core of
MassMutual’s business. We support the objectives of the Proposal and believe it can, with
appropriate modifications, advance the purposes of the private retirement system.

?3 See the Preamble to the final regulation implementing the Pension Protection Act investment advice provisions,
76 Fed. Reg. 66151-66153 (October 25, 2011) (*...the retirement income security of America’s workers increasingly
depends on their investment decisions. Unfortunately, there is evidence that many participants of these retirement
accounts often make costly investment errors due to flawed information or reasoning. Financial losses (including
foregone earnings) from such mistakes likely amounted to more than $114 billion in 2010...Such mistakes and
consequent losses historically can be attributed at least in part to provisions of the Employee Retirement Income
Security Act of 1974 that effectively preclude a variety of arrangements whereby financial professionals might
otherwise provide retirement plan participants with expert investment advice.")

4 Borzi, Phyllis, Statement to the Senate, Special Committee on Aging (June 16, 2010), available at
https://www.dol.gov/ebsa/newsroom/ty061610.html.

25 Whitehouse Council of Economic Advisers, The Effects of Conflicted Investment Advice on Retirement Savings 3
(Feb. 2015), available at https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf.

6 See, e.g.,Oliver Wyman, The Role of Financial Advisors in the US Retirement Market, July 2015, p. 16, available
at http://fsroundtable.org/wp-content/uploads/2015/07/The-role-of-financial-advisors-in-the-US-retirement-market-
Oliver-Wyman.pdf; LIMRA, Advisors Positively Influence Consumers' Behavior and Sentiment Toward Preparing
Sor Retirement, July 2012, available at

http://www. limra.com/Posts/PR/News_Releases/LIMRA__Advisors_Positively_Influence Consumers_ Behavior_
and_Sentiment_Toward_Preparing for Retirement.aspx

23


Recommended Changes

The relief provided by PTE 84-24 should not be limited to any particular kind of compensation.
In the preamble or otherwise, the Department should also confirm that the benefits provided to
career agents and override payments are within the scope of the relief provided by PTE 84-24.
The Department should also revise the definition of “Insurance Commission” and “Mutual Fund
Commission” to clarify that affiliates of insurance agents, brokers and pension consultants may
receive 12b-1 fees and other forms of indirect compensation while remaining within the scope of
PTE 84-24.

Section IV. BICE Needs Significant Revisions to be Viable as an Exemption

From any reasonable business perspective, BICE is not workable as proposed. Without
significant changes, small plans and IRA owners will be unnecessarily deprived of needed
financial advice. At a minimum, the following revisions to its conditions (and corresponding
provisions in other exemptions) are necessary.

As more fully discussed in other comment letters, we note at the outset our understanding that
the Department intends to clarify that (1) BICE provides relief for the investment product
purchase itself as well as compensation related to that purchase, (2) relief is available under
BICE for advice with respect to plan investment menus, as well as specific investment
transactions, and (3) fiduciary advice with respect to investment service providers is within the
scope of BICE. We support those clarifications.

Comment: Timing and Format of the Written Contract is Impractical.

The contract mechanism in BICE must be entirely reconsidered. Requiring that a contract be
signed before substantive discussion with a client or potential client can occur ignores the reality
of how advisory relationships are established and will serve as a disincentive for clients to
comparison shop. Clients should be able to discuss and fully understand the adviser’s
recommendations before entering into a contract. Allowing the contract to be provided before
the recommendation is executed, instead of before the recommendation is made, in no way
undermines the Department's goal of requiring that the recommendation be in the retirement
investor’s best interest. Finally, the tri-party nature of the contract is problematic given that
advisers often switch firms. It is for this reason that we typically do not include our
representatives as signatories on advisory or similar agreements with our customers. And for
call center interactions, it would make no sense to require that customers enter into a formal
written agreement with their financial institutions and a randomly assigned customer service
representative. The costs of compliance with this contract mechanism, which the Department
estimates would be minimal, would in fact be very significant.

Recommended Changes

The contract requirement should be removed or, at the very least, should not be required until
implementation of the adviser’s recommendation or the time account opening paperwork is

18


As an example, an IRA platform would ordinarily have hundreds (or more) of investment
options (e.g., mutual funds). It would not be workable as a practical matter to treat a large and
diverse platform of potential IRA investments as a fiduciary recommendation to use all of these
investments. First, there would never be a recommendation to use all of the investments.
Second, the disclosures required by the Best Interest Contract Exemption — if the offering were
viewed as an investment recommendation — would be so voluminous as to overwhelm investors
with thousands of data points.

Recommended Changes

The platform and related selection and monitoring assistance carve-outs should be modified to
include IRA platforms and delete the “without regard to the individualized needs” clause. The
status of investment advisers and managers and other service providers included on platforms, as
well as the identification of IRA providers to receive mandatory rollovers, should also be
clarified.

Comment: The Application of the Proposal to Rollover Advice Must be Clarified.

The most aggressive position taken by the Department in the Proposal is the ‘ERISAfication’ of
IRAs, including rollover advice. As the Proposal stands, however, it is entirely unclear how the
Department intends advisers and other providers will deliver rollover services to participants,
which are badly needed, inter alia, to minimize “leakage” from the retirement system. It appears
the mere offer to provide rollover advice, under any service or compensation model, would be
fiduciary advice, by reason of section (a)(1)(iv). There is no exemption in the Proposal that
explicitly provides relief for making that offer. And there is no exemption that provides relief
for the rollover advice per se, as distinguished from investment purchases made in a plan or IRA
reflecting that advice. Such an expansion of the scope of “investment advice” to encompass
IRAs would be a significant departure from precedent and appears to be irreconcilable with
Congressional intent and the Department’s longstanding position. If the Department is
determined to bring rollover advice into the ERISA fiduciary environment, it is incumbent upon
the Department to provide a clear, reliable means to deliver that advice in a compliant manner
and to provide an adequate explanation as to why practices it previously deemed acceptable are
now problematic.

Recommended Change

The rules for rollover advice must be clarified to avoid any inadvertent gaps in the scope of relief
provided, and expressly include distribution and rollover advice within the scope of the final
exemptions.


disclosures that: (a) the seller receives compensation as a result of the
transaction; (b) that such compensation presents a conflict of interest and gives
the seller an incentive to recommend products based on the compensation
received; and (c) that the investor can obtain similar services from other sellers
for similar, lower or higher fees. At a minimum, the carve-out should be
available with respect to proprietary products and services.

2s Clarify that investment recommendations made by wholesalers to fiduciary
advisers do not constitute advice.

Comment: The Education Carve-Out for Participants and IRA Owners Should Allow
Model Portfolios to Identify Specific Investments.

Interpretive Bulletin 96-1 (“IB 96-1”),’ adopted during the Clinton Administration, has been one
of the great success stories of ERISA regulation during the last two decades. By codifying on
workable terms a sensible distinction between investment education and investment advice, it
facilitated the delivery of practical information to plan participants early in the shift from defined
benefit to defined contribution plans. Advisers, platform providers and others have been able to
help participants understand and implement changes to their accounts in a way that would not be
possible otherwise. To our knowledge, there is no record that the terms of IB 96-1 have been
abused or have otherwise caused harm to participants during the nearly 20 years IB 96-1 has
been available for use.

Accordingly, we applaud the Department for the elements of the Proposal’s education carve-out
that expand the definition of education to include information provided to plan fiduciaries and
IRA owners, as well as to participants, and to include information regarding retirement income
needs and risks. These changes would be very helpful in increasing information available to
plans, participants and IRA owners.

Unfortunately, the proposed restriction on model asset allocation portfolios referencing specific
investments is a regrettable step backwards. Model portfolios have been an efficient and
effective means to educate retirement investors about the investment of their accounts. As
presented in participant education meetings, for example, or as made available online by
platform providers, model portfolios have proven to be among the most useful tools for
participants making independent decisions regarding their plan investments. Prohibiting such
models from linking the allocations to the available investments selected by the plan fiduciary or
the IRA investment platform, would render them nearly useless to investors. Forcing each
individual retirement investor separately to ascertain the classification of those available
investments would be extraordinarily and needlessly inefficient and will likely result in fewer
retirement investors taking action to save for retirement. And none of this activity includes the
sort of interactions that the Department is concerned might be confusing to retail investors.

Given the proposed expansion of fiduciary status and its potential chilling effects on advisers, the
education carve-out takes on greater importance in both the IRA and plan context. The
Department will seriously compromise the real-world utility of educational model portfolios if
the educator is prohibited from connecting the model allocations to available investments. The

729 CFR §2509.96-1.


disclose their relationship with MassMutual, and abide by legally-mandated duties of care to
those purchasing these products. °

There can be no reasonable confusion in the marketplace that MassMutual and its sales
representatives have an economic interest in the sale of MassMutual products and services. Ifa
retail retirement investor is speaking with a MassMutual representative about a MassMutual
product or service, there can be no reasonable expectation that MassMutual or its representative
is acting as a wholly impartial adviser to the investor or is providing investment advice free from
competing interests. This is, unambiguously, a sales setting.

With proper disclosure that the seller is offering proprietary products, is compensated based on
selling those products, and is not providing fiduciary advice, there should be no confusion on the
part of small plans, plan participants or IRA owners about whether impartial advice is being
provided. There is no need to determine the level of financial sophistication of the plan or
individual. Consumers understand that a salesperson representing proprietary products is not
giving impartial advice. Clear and prominent disclosure will provide the necessary notice to the
plan, participant or IRA owner.

Accordingly, even if the Department does not expand the seller’s carve-out to small plans and
IRAs, we recommend that the Department provide an additional carve-out from fiduciary advice
for sales of proprietary products where appropriate disclosures have been made to the plan
fiduciary, plan participant or IRA owner. We further recommend that the Department look to
existing SEC disclosure requirements applicable to advisers as the road map for appropriate
disclosure that clearly explains the seller’s interest in the sale and warns that the seller is not
impartial.

Wholesalers. It is our understanding that the Department has informally confirmed its intent
that recommendations made by the representatives of retirement plan providers, insurance
companies, and mutual funds (commonly called “wholesalers”) to investment advisers (who are
themselves fiduciaries by virtue of providing advice to plans, participants, or IRAs) would not
constitute advice under the Proposal. We request that the Department formalize this
interpretation in any final rule.

Recommended Changes

The Proposal should be modified as follows:

1. Make the seller’s carve-out available with respect to all plans as well as
participants and IRA owners, conditioned on clear, useful and prominent

fair dealing to their customers and are required to comply with “just and equitable principles of trade” under FINRA.
rules. See Supplementary Material .01 of FINRA Rule 2111 (fair dealing) and FINRA Rule 2010 (just and equitable
principles of trade)

© Under state insurance laws, insurance producers and insurers must comply with the Suitability Regulation which
imposes a duty that all recommendations of annuities be suitable for the purchaser. Broker-dealers offering
securities products are required to comply with FINRA’s “know your customer” rule (FINRA Rule 2090) as well as
its general suitability rule (FINRA Rule 2111). In addition, broker-dealers offering deferred variable annuities must
also comply with a product-specific suitability rule for the offer and sale of variable annuity contracts (FINRA Rule
2320).


completed, with execution of the contract allowed through a “negative consent” process. The
adviser should not be a required party to the contract.

Comment: The Warranties are Not Well-Conceived and Will Unnecessarily Expose
Advisers and Financial Institutions to Unacceptable Litigation Risk.

The warranty provisions of BICE are highly problematic. Because of the subjective and overly
broad nature of the warranties, compliance with the warranties could not be assured in advance,
despite a financial institution’s best efforts to do so. While the preambles suggest that the
Department will consider materiality when exercising its prosecutorial discretion in asserting a
violation of the “best interest” component of the exemption, the Department would not be the
sole arbiter of these matters given the private right of action it proposes to create. Instead,
compliance will be interpreted and enforced (almost certainly in a conflicting manner) by juries
and arbitration panels in all 50 states. Given the significant litigation risk, including class
actions, it is almost a certainty that advisers and financial institutions will exit markets where the
size of the retirement accounts will not justify taking on this risk, and/or increase the costs of
their products and services to compensate for this risk. Neither outcome is in the best interest of
the retirement investor.

Furthermore, warranty (d)(1) is superfluous in encouraging compliance with other applicable
laws, each of which is designed to stand on its own from an enforcement perspective. It may
also create private rights of action where Congress or a state legislature purposefully did not
provide for private enforcement of such laws and will complicate the settlement of enforcement
actions by the agencies responsible for the administration of such laws. Finally, the formulation
of the warranties can be read to exclude any economic interest on the part of the retirement
adviser and to prohibit anything other than level-fee arrangements, even if the interests of the
retirement investor are put first, which is inconsistent with the apparent intent of the Proposal.

Recommended Changes

The warranties should be replaced with a requirement that financial institutions relying on BICE
adopt written policies and procedures reasonably designed to (1) identify any Material Conflicts
of Interest, (2) mitigate the impact of any Material Conflicts of Interest, and (3) ensure that
individual advisers adhere to the Impartial Conduct Standard. This should fully satisfy the
Department’s objective of mitigating conflicts of interest and providing a remedy to investors,
while at the same time eliminating the negative consequences of overly broad and subjective
contract guarantees.

If the warranties are retained, they should be subject to a reasonableness standard and a safe
harbor should be made available for good faith compliance with the specified requirements.

Comment: Transaction Disclosures and Annual Disclosure Requirements Need to be
Amended to Provide Meaningful and Cost Effective Disclosure to Investors.

We support the Department’s efforts to ensure retirement investors have access to relevant cost
and commission information prior to entering into a securities transaction so that they can make

19


Mandatory Automatic Rollover and Investment Services Available Through Retirement Plan
Platforms. The Proposal indicates that the recommendation of an investment manager or adviser
is a fiduciary act. Since investment services offered on a platform are analogous to the selection
and monitoring of investment products, the Department should clarify that such services also are
within the scope of the platform carve-out.

Many platforms provide access to investment services, such as independent third party
investment advice and investment management, in addition to investment options. These
optional services are offered on the platform to facilitate investment advice for plan participants
or plan sponsors that lack investment expertise. A platform provider should not be a fiduciary
under the Proposal as a result of making these services available, since the availability of the
investment manager is not intended to be advice that is individualized or specifically directed to
the plan sponsor as a recommendation. Instead, the platform provider simply offers the service
and provides information about the nature and cost of those services. If the plan sponsor
ultimately selects the investment advice or investment management service, the adviser or
manager will be a fiduciary with the accountability to the plan that the Proposal is intended
ensure.

Similarly, it is common for a recordkeeper to offer an IRA provider on its platform. The IRA is
generally offered as a service along with the “bundle” of other recordkeeping services and is
necessary to enable plan sponsors to satisfy a plan’s mandatory automatic rollover (“MAR”)
provisions. Such mandatory rollovers are, of course, a tax qualification requirement for section
401(a) plans. The Department has provided safe harbor rules and exemptive relief for this
process, and plan sponsors expect providers to support these requirements with a rollover IRA
option and necessary functionality. It is impractical for a recordkeeper to offer more than one
alternative to satisfy MAR. Given the broad and sweeping language in the Proposal and its
preambles,’ it is unclear whether the mere identification of the mandatory rollover provider
might constitute fiduciary advice. That service is, however, surely integral to offering a
retirement platform, and the Department should clarify that such services also are within the
scope of the platform carve-out. In considering this comment, the Department should keep in
mind that the MAR IRA is offered to plan fiduciaries for their consideration and decision about
whether to use it for their plan. It is only after approval by the plan fiduciaries that the service is
implemented.

IRA Platforms. The exclusion of IRA platforms from the platform carve-out leaves those
structures in unacceptable limbo. It is indisputable that an IRA platform provider, like a plan
platform provider, must be permitted to develop and maintain the platform to serve its own
business interests. Without a platform carve-out, however, those providers are exposed to
private litigation for merely constructing a product -- an exposure that the Department would
impose on those providers with its expanded fiduciary definition. And the point at which, in the
Department’s view, the IRA platform provider is obliged to subordinate its interests to those of
IRA owners would be entirely unclear without a platform exception. Neither of those points can
be left to resolution through litigation after adoption of a final rule. The platform carve-out must
be available for IRAs as well as plans.

® See, e.g, the preamble to the proposed definition, 80 Fed. Reg. at 21938 n. 16.
9


MassMutual

FINANCIAL GROUP®

July 21, 2015
Submitted Electronically

Office of Regulations and Interpretations
Office of Exemption Determinations
Employee Benefits Security Administration
U.S. Department of Labor

200 Constitution Ave., NW

Washington, DC 20210

e-ORI@dol.gov

e-OED@dol.gov

Re: _ Definition of the Term “Fiduciary” (RIN 1210-AB32)
Best Interest Contract Exemption (ZRIN 1210-ZA25)
Amendment of PTE 84-24 (ZRIN 1210-ZA25)

Ladies and Gentlemen:

Massachusetts Mutual Life Insurance Company (“MassMutual”) respectfully submits its
comments on the Department of Labor’s (the “Department”) proposed rule redefining the term
“fiduciary” and related exemptions (the “Proposal”). Given the significant costs and wide-
ranging impact the Proposal will have on the availability of advice for retirement plans and
Individual Retirement Accounts (“IRAs”), we appreciate the Department meeting recently with
us to discuss our concerns and expressing its interest in modifying the Proposal to create a
workable rule.

Founded in 1851, MassMutual’s mission is to help our customers secure their future and protect
the ones they love by making good financial decisions for the long term. We are a leading
mutual life insurance company and Fortune 100 Company headquartered in Springfield,
Massachusetts. As a mutual company, we operate for the benefit of our members and
participating policyholders, and offer a range of quality financial products and solutions,
including life, disability and long-term care insurance, annuities and retirement/401(k) plan
services, We currently serve almost two million life, disability, long-term care and annuity
customers and approximately three million participants in nearly 35,000 retirement plans, the
majority of which are for the benefit of small business owners and their employees.

Throughout our history, MassMutual has provided financial and retirement security to millions
of Americans. We share the Department’s goals of protecting investors and encouraging
retirement savings. We are greatly concerned, however, that the Proposal as currently drafted is
overly broad and ambiguous and will result in (1) fewer Americans saving for retirement, (2)
reduced guidance for retirement investors, increasing costly investment errors, and (3) fewer
guaranteed lifetime income products, an increasingly important component of retirement savings

1
‘MassMutual Financial Group isa marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives,

Springfield, MA 0111-0001 + ~~ (413) 788-8411
$1002 410


Under this standard, the Adviser and Financial Institution must put the interests of the
Retirement Investor ahead of the financial interests of the Adviser, Financial Institution
or their Affiliates, Related Entities or any other party.'!

Recommended Changes

We suggest replacing the reference to “without regard” in both BICE and PTE 84-24,
respectively, with the following language:

For BICE: without regard-te putting the financial or other interests of the Adviser,
Financial Institution or any Affiliate, Related Entity, or other party ahead of
the Retirement Investor.

For 84-24: without regard+te putting the financial or other interests of the fiduciary, any
affiliate or other party ahead of the plan or IRA.

More generally, if it is intended that the section 404(a) standards comprise the Best Interest
standard, the Department should say so on the face of the exemptions.’* If any other standard is
intended, it is incumbent on the Department to justify the variation from section 404(a) and
previous interpretations and to provide much more specific guidance about that standard than it
has to date; it is untenable to leave this essential standard to be interpreted through enforcement
and litigation after adoption.

Comment: The Impartial Conduct Standards Must Accommodate the Benefits Provided
to Career Insurance Agents.

Like many of its peer companies, MassMutual distributes annuity and insurance products
through a “career agency system” of financial professionals. In contrast to independent
insurance agents — who owe no particular loyalty to any one company — career agents agree to
primarily represent one insurance company and principally sell and service that company’s
insurance and annuity products. Under a legal framework that has been in place for over 60
years, this arrangement makes career agents “full-time life insurance salesmen,” eligible under
section 7701(a)(20) of the Internal Revenue Code to participate in their company’s health and
retirement plans. In addition, career agents also receive substantial training and education
support from the insurance company they represent. The career agent model seeks to foster a
long-term relationship between the insurance company and its customers — a relationship that is
maintained by a highly-trained, well supervised agent and that is beneficial to both the customer
and the company.

The Department’s proposal would re-characterize the selling and servicing activities of career
agents to plan participants, beneficiaries and IRA owners as fiduciary in nature and subject these
activities to the impartial conduct standards under PTE 84-24 and BICE. Advisers and Financial

'l 80 Fed. Reg. 21,960, 21,970; see also 80 Fed. Reg. 22,010, 22,014 (Apr. 20, 2015) (preamble to proposed PTE
84-24 amendments).

"° That approach would avoid two different standards for investment advice fiduciaries to Title I plans, under the
statute and under the class exemptions, which seems hard to defend. It would also bring the body of section 404(a)
precedents to bear under the Best Interest standard rather than starting anew, which would be of great assistance in
the implementation of the Proposal.


Section IT: Comments on the Impartial Conduct Standards
Comment: The Definition of “Best Interest” Must be Modified.

The definition of “best interest,” which is a core provision under the impartial conduct standards
in both the Best Interest Contract Exemption (“BICE”) and PTE 84-24, should be clarified to
avoid an implication that a retirement adviser is barred from having any financial interest.

BICE Section II(c)(1) provides:

When providing investment advice to the Retirement Investor regarding the Asset, the
Adviser and Financial Institution will provide investment advice that is in the Best
Interest of the Retirement Investor (i.e. advice that reflects the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent person would exercise
based on the investment objectives, risk tolerance, financial circumstances, and needs of
the Retirement Investor, without regard to the financial or other interests of the Adviser,
Financial Institution or any Affiliate, Related Entity, or other party)(emphasis added).

PTE 84-24 Section II (a) requires the following condition be met:

When exercising fiduciary authority described in ERISA section 3(21)(A)(ii) or Code
section 4975(e)(3)(B) with respect to the assets involved in the transaction, the insurance
agent or broker, pension consultant, insurance company or investment company principal
underwriter act in the Best Interest of the plan or IRA.

And PTE 84-24 Section VI (b) states that a fiduciary acts in the “Best Interest” of the plan or
IRA when:

[T]he fiduciary acts with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person would exercise based on the investment objectives,
tisk tolerance, financial circumstances, and needs of the plan or IRA, without regard to
the financial or other interests of the fiduciary, any affiliate or other party (emphasis
added).

The reference to “without regard” under the impartial conduct standards would subject advisers
and financial institutions to unnecessary litigation claiming that this language prohibits the
adviser or financial institution from having any financial interest in or receiving any
compensation as a result of the transaction. We do not believe that i BS the Department’s intent.
Longstanding interpretations, including by the U.S. Supreme Court?, make clear that ERISA
section 404(a) permits “incidental benefits” to fiduciaries.'° And the preambles to BICE and PTE
84-24 provide clarity on this issue:

° See Hughes Aircraft v. Jacobson, 535 U.S. 432 (1999); Lockheed Corp. v. Spink, 517 U.S. 882 (1996).
0 See e.g., Advisory Opinions 2011-05A, 2003-04A, and 2001-01A.

11


disclosures provided in IB 96-1 provide sufficient notice to participants and IRA owners that
other investment alternatives are available.

Recommended Changes

The Proposal should retain the terms of IB 96-1 within the education carve-out and should (1)
allow model asset allocations referencing specific investments for plans and IRA owners and (2)
make the carve-out available for specific investments with respect to decumulation products.

Comment: The Platform Carve-Out Should Be Improved.

Responses Provided by a Platform Provider. It is imperative that any final rule retain the
distinction between platform providers offering hypothetical investment line-ups or product
packages, and fiduciary investment advice. When a plan fiduciary or IRA owner decides to hire
a platform provider and selects from among its available investments and services, the platform
provider is not and should not be a fiduciary for offering products and investment line-ups that a
plan fiduciary or IRA owner may select.

Specifically, we are concerned about the phrase “without regard to the individualized needs ....”
It is not clear to us what conduct the Department intends to exclude with this language, as it
would be nearly impossible for any service provider to offer a platform or hypothetical
investment line-up that does not take into account the individualized needs of the counterparty in
some manner. There is a difference between making investment recommendations, and
responding to the requests of the plan or IRA owner with a selection of available options that
meet the investor’s criteria.

Under section (b)(4) of the proposed fiduciary definition, the Department permits selection and
monitoring assistance related to the platform as long as the person “[m]erely identifies the
investment alternatives that meet objective criteria specified by the plan fiduciary (e.g., stated
parameters concerning expense ratios, size of the fund, type of asset, credit quality).” This
provision, while helpful, is too narrow. It appears to ignore a common industry practice that
provides valuable assistance to plan fiduciaries when transferring plan assets to a new investment
platform by providing hypothetical investment line-ups that can be used for mapping current
investments to those available from the new provider. The issue from a fiduciary perspective is
not whether the response to the plan or IRA owner is individualized, i.e., providing the type of
products or services requested, but whether the platform provider is recommending that the plan
select certain products or services. Responding to an inquiry from a plan fiduciary for specific
information about products and services, even with a response that is based on a request that is
individualized by the plan fiduciaries or IRA owner, is not advice.

For example, a plan fiduciary might ask a platform provider to create a hypothetical investment
line-up that satisfies the requirements for the 404(c)(4) mapping safe harbor, that has target date
funds that qualify for QDIA default protections, that meet certain share class and/or expense
ratio criteria, that satisfy certain performance standards, and that provide a specified level of
revenue sharing. With appropriate disclosures, and based on the criteria established by the
fiduciaries, there should be no rational basis for the investor to assume that the provider was
recommending those investments or services.


e There is no universal solution that is in the best interest of all retirement investors. To
take just one example, promoting lower cost to the exclusion of features such as lifetime
income guarantees would exacerbate the current retirement crisis and is in direct conflict
with the Department’s and Treasury Department's joint stated policy goal of encouraging
the use of lifetime income options in retirement plans — a policy that was just reiterated in
Field Assistance Bulletin 2015-02, released during the pendency of the comment period
for this Proposal.

e Nor is cost the universal or even principal driver for investment decision making in
retirement plans. Under the Department’s own regulation governing investment
decisions, for example, which will still be in effect if the Proposal is definitively adopted,
fiduciaries are to give consideration to all relevant facts and circumstances, including the
role of the investment in the plan’s portfolio.’

e Finally, passive investments are possible only if there are active investors in the market.
It would distort our financial markets if the pool of capital represented by retirement
plans was all or substantially shifted to passive strategies.

Recommended Changes

Given the potential for unintended consequences, together with the Proposal’s lack of any detail
whatsoever, the streamlined exemption at a minimum must be the subject of a separate
regulatory project. Insufficient time and information have been given to analyze and comment
on a hypothetical exemption as part of this already voluminous Proposal.

Conclusion

As is widely recognized, America’s private retirement system faces pressing challenges:

© More than 53% of adult Americans are not covered by a workplace retirement plan.”°
Even when IRAs are taken into account, more than 31% have no retirement savings.”!

e As of 2013, the median retirement savings of Americans amounted to $59,000 and is
inadequate to their retirement needs.”

e Defined contribution plan participants and IRA owners significantly affect their
retirement security through the investment choices they make for their accounts. By the
Department’s own estimate in 2011, they suffer $100 billion or more in investment losses

° 29 CER §2550.404a-1,

?° Bureau of Labor Statistics, Establishments Offering Retirement and Healthcare Benefits (Match 2014), available
at http://www.bls.gov/nes/ebs/benefits/2014/ownership/private/table0 1la.htm.

21 Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in
2013 26 (July 2014), available at http://www. federalreserve.gov/econresdata/20 13-report-economic-well-being-us-
households-201407.pdf.

2 Federal Reserve Bulletin 100:4, Changes in U.S. Family Finances from 2010 to 2013 17 (Sept. 2014), available at
http://www. federalreserve.gov/pubs/bulletin/2014/pdf/scfl4.pdf .

22


Recommended Changes
Section (a)(2)(ii) should be modified as follows:

(ii) Renders the advice (A) pursuant to a written or verbal agreement, arrangement or
mutual understanding that the advice is individualized to erthatsuch-advieeis-
specifically directed-to, the advice recipient for consideration in making investment or
managements decisions with respect to securities or other property of the plan or IRA,
and (B) under circumstances creating a reasonable expectation on the part of the advice
recipient that advice will be provided in the interest of the advice recipient.

Comment: The Definition of Recommendation is Too Broad.

Under the Proposal, a recommendation is “a communication that, based on its content, context,
and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in
or refrain from taking a particular course of action.” This definition, which encompasses
virtually any communication that might be construed a “suggestion,” is too broad.

We understand from the preamble that the Department looked to FINRA guidance — specifically,
NASD Notice to Members 01-23 — as a model for this definition. However, the Proposal leaves
out significant language and context from that guidance. The FINRA Notice does not provide
that a mere suggestion to engage in behavior is a recommendation. Rather, it focuses on
whether, under the facts and circumstances, the communication might be viewed as a “call to
action” that would reasonably influence an investor to trade a particular security or group of
securities. The Proposal’s definition omits any reference to “influence” or similar concept. It
also lacks any limitation that the communication be directed to “taking action” with regard to a
particular security or group of securities.

Moreover, the FINRA guidance is directed to whether the conduct in question amounts to selling
activity, subject to a suitability standard, not whether that conduct rises to the much higher duty
of fiduciary-level investment advice. Logically, the standard for whether a communication rises
to the level of fiduciary advice should be higher than the standard for whether the
communication is selling activity. The proposed definition has the opposite result.

Recommended Changes

This over-inclusive definition of “recommendation” should be revised so that it does not
preclude a provider from marketing products and communicating with investors without
becoming a fiduciary. The definition should be revised to limit communications that direct the
investor to take prescribed actions that the adviser believes are in the investor’s best interest.

Comment: The Proposed Seller’s Exception Should be Expanded.

We are concerned that that the proposed “carve-outs” are unnecessarily limited and too narrowly
drafted to allow beneficial business models and practices to survive.

Product Sales. One of our primary concerns with the Proposal is that it conflates the sale of
insurance or investment products with advice, and seeks to impose on sales activity a regulatory

4


Proposal creates such a level of uncertainty and risk on this point that retirement advisers will
hesitate to recommend that product — a perverse result given the objectives of the Proposal.

These are not points on which the Department can leave the regulated community to take
positions at their own risk. By examples in the final preambles or otherwise, it is essential that
the Department confirm these points.

Recommended Changes

The preamble to BICE should provide clear examples where differential compensation by
product type would be permissible under the impartial conduct standards. The preamble should
also make clear that differential compensation within particular product types is not prohibited
under the impartial conduct standards and provide clear examples where varying compensation
would be permissible.

Comment: The Impartial Conduct Standards Must Not Disadvantage Proprietary
Products.

We are also concerned that the Proposal’s ambiguous language regarding impartial conduct
standards may place proprietary products at a distinct disadvantage to nonproprictary products.
It would be an inexplicable outcome if MassMutual agents were disadvantaged by the Proposal,
relative to unrelated brokers or agents, in offering MassMutual’s products and services to
retirement investors.

At a minimum, the final rule must reconcile the offering of proprietary products and services
with the impartial conduct standards proposed for several class exemptions (discussed above).
For example, the suggestion in BICE’s preamble that special constraints may apply to sales
compensation for proprietary products,“ or the difference in the formulation of BICE’s
“reasonable compensation” requirement generally and for proprietary products,'* is unwarranted.
The Department must make it clear that the provider’s inherent interest in its own products and
services is not a violation of the impartial conduct and related standards. The Department has
indicated that the Proposal is not intended to prohibit current business models and practices.
However, as discussed above, the Proposal could have the opposite effect with respect to our
career agency system and the sale of proprietary products leading to truly illogical consequences
at odds with the best interests of investors.

Recommended Change

The Department should clarify that the sale of proprietary products and receipt of “differential
compensation” are not inconsistent with the Impartial Conduct Standards.

'4 80 Fed. Reg. at 21972.
'5 CE section II(c)(2) and section IV(b)(2) of the proposed BICE

15


Comment: Non-Proprietary Mutual Funds Should be Added to PTE 84-24 for
Retirement Plans.

As the Department has informally acknowledged, the proposed complex of exemptions for
investment activity inadvertently omitted any product-specific relief for non-proprietary mutual
fund transactions sold to plans on an agency basis. This omission needs to be corrected — such
transactions are the most common investment activity in the retirement system — and, particularly
in light of the expanded definition of investment advice fiduciary, relief must be provided for
fiduciary advice with respect to such transactions.

Inasmuch as the protections of PTE 84-24 have been determined and proven to be appropriate
for proprietary mutual fund transactions, they should more than suffice for non-proprietary fund
transactions. Accordingly, we recommend that such transactions be added to PTE 84-24 for
retirement plans.

Recommended Changes

The relief in PTE 84-24 for mutual funds should not be limited to proprietary funds, but should
include non-proprietary funds as well.

Comment: The Conditions of PTE 84-24 Should be Clarified.

We appreciate the retention of PTE 84-24 in the Proposal and, as discussed above, urge that its
coverage be expanded to variable annuities and non-proprietary mutual funds. The Proposal’s
definition of “Insurance Commission” and “Mutual Fund Commission,” however, creates
uncertainty about well-established compensation models in the insurance industry. The products
covered by PTE 84-24 over time have come to provide for 12b-1 fees and other forms of indirect
compensation other than traditional insurance or securities commissions. There is no justifiable
reason to exclude any such compensation from the relief provided by PTE 84-24 solely by
reason of the form of the compensation; neither the “conflicted” interest nor the appropriate
relief for that conflict qualitatively differs with the form the compensation takes — as the
proposed BICE properly acknowledges. The proposed exclusion of 12b-1 and similar fees also
would needlessly create uncertainty where, as is often the case, those fees are used to defray plan
expenses rather than as compensation retained in a distribution channel. And, with respect, the
Department has over the years assiduously declined to take a definitive and consistent position as
to whether such forms of compensation were covered by PTE 84-24 and certain other
exemptions.'”

In any event, the Proposal needs to make clear that the payment of overrides to individuals other
than the selling agent (such as general agents and other supervisors) is permissible as it is simply
another component of the compensation paid for the sale of the product. And, as noted earlier, in
career agency systems, such as MassMutual's, annuity sales count towards an agent’s eligibility
for receiving health and retirement benefits. The Proposal should make clear that such
arrangements do not run afoul of the exemption’s limitation on acceptable forms of
compensation.

" See Advisory Opinions 2006-06A, 2003-09A, 93-12A, and 93-13A.

17


investment platform providers must have confidence that ordinary course sales recommendations
will not, in hindsight, be subjected to a fiduciary standard that disallows the payment of sales
commissions and other traditional forms of distribution-related compensation. Parties engaged
in transactions with ERISA plans and IRAs need clear, unambiguous rules by which to
determine their duties and obligations in order for the marketplace to function efficiently and to
ensure that plans, plan participants and IRA owners continue to have a broad range of products
and services available to them, including investment advice and educational services.

The mutuality requirement is also critical because even certain individualized recommendations
are clearly not intended to be investment advice. For example, retirement plan sponsors
frequently issue request for proposals (“RFPs”) inviting responses from multiple investment and
service providers. As a condition of responding to the RFP, the provider is often required by the
plan sponsor or its adviser to submit a hypothetical investment line-up comparable to the plan’s
current line-up and which provides sufficient revenue to cover the cost of plan services. The
plan sponsor in that case has no reasonable expectation that the investment provider’s response is
intended as investment advice, yet, in the absence of a mutuality requirement, the response could
later be characterized as advice regardless of the parties’ intentions in issuing and responding to
the RFP.

In order to address the Department’s concerns, the determination of whether the parties, in fact,
had a mutual understanding could be determined by whether the plan or IRA owner should have
reasonably expected that the advice would be provided in the plan or IRA owner’s interest.

Specifically Directed. The “specifically directed” component of the proposed definition will
lead to line-drawing exercises and inconsistent interpretations. For example, assume that a
MassMutual agent mails to her retirement customers information about new MassMutual
retirement products. Those mailings would be “specifically directed” to their recipients in the
sense that each envelope would bear an individual name and address, but such a mass
communication is in no fair sense “investment advice” that should be subject to ERISA fiduciary
standards.

Other examples of “specifically directed” investment information that are not in the nature of
investment advice include investment information provided by call center employees in response
to customer inquiries; mail and email campaigns that target particular classes of participants and
include references to investment offerings; and outreach to plan participants who have reached
an age that makes them eligible for in-plan annuity options. Simply put, the “specifically
directed” concept is overbroad.

It appears from the preamble that the Department included the “specifically directed” language at
least in part to address the “bait and switch” problem it has identified as supporting the expanded
definition, but section (a)(2)(i) of the proposed definition independently resolves that concern.


as defined benefit pension plans are eliminated. It is with the goal of balancing customer choice,
access and protection that we offer the following comments.

Section I: Comments on Fiduciary Advice Definition

Comment: The Proposed Expansion of the Fiduciary Advice Definition Should Be
Revised to Require a Mutual Understanding of the Parties, Delete the
“Specifically Directed” Concept, and Revise the Definition of
Recommendation.

The Department has proposed a definition of “investment advice” that is unprecedented in its
scope and complexity. The Proposal goes well beyond any definition reasonably ascribed either
to the intent of Congress in passing ERISA in 1974 or any interpretation of the statutory
definition articulated by the courts or adopted by the Department in the 41 years since the
enactment of the statute.’ It introduces novel concepts that have never previously been
implemented under any definition of “investment advice” under any body of law, to our
knowledge, and creates uncertainty. And it is broader than is justified by the circumstances
identified by the Department as supporting an update of the definition.”

Section (a)(2)(ii) of the definition effectively replaces the current five-part test with the
following, much broader criteria:

Renders the advice pursuant to a written or verbal agreement, arrangement or
understanding that the advice is individualized to, or that such advice is specifically
directed to, the advice recipient for consideration in making investment or management
decisions with respect to securities or other property of the plan or IRA.

Mutuality. There has been much confusion about the importance of the omission from the
Proposal of the term “mutual” from the existing five-part test, inasmuch as the preamble
suggests, and the reference to an “agreement, arrangement or understanding” implies, that a
bilateral meeting of the minds between the adviser and the advice recipient is intended. This is
not a point on which the Proposal can afford to be uncertain. Investors need certainty and
accurate expectations regarding the duty owed to them by their advisers. Advisers and

' See e.g., Tiblier v. Dlabal, 743 F.3d 1004 (Sth Cir. 2014), Cottrill v. Sparrow, Johnson & Ursillo, Inc., 74 F.3d 20
(1st Cir. 1996), American Fed’n of Unions Local 102 Health and Welfare Fund v. Equitable Life Assurance Soc. of
the U.S., 841 F.2d 658 (Sth Cir. 1988), Farm King Supply Inc. Integrated Profit Sharing Plan & Trust v. Edward D.
Jones & Co., 884 F.2d 288 (7th Cir. 1989); Brown v. Roth, 729 F. Supp. 391 (D.N.J. 1990), Austin v. General
American Life Ins. Co., 498 F.Supp. 844 (N.D.Ala. 1980).

2 In both the October 2010 proposal and the Proposal, the Department discussed the fiduciary redefinition
exclusively in terms of investment advice to retirement plans and IRAs. There is nothing to suggest that the
Department considered whether, or intended, to subject decisions to purchase insurance products related to welfare
benefit plans to the expanded scope of the proposed definition; certainly, such matters are beyond the scope of the
Regulatory Impact Analysis submitted by the Department in connection with the Proposal. We understand that
senior officials at the Department have informally stated that the Department did not intend to address these issues
with the Proposal. In the interest of clarity, we recommend the Department explicitly limit the expanded definition
in any final regulation to pension benefit plans and IRAs, and retain the existing definition for welfare plans.


Institutions seeking to comply with BICE are obligated to follow policies and procedures to
mitigate the impact of Material Conflicts (defined as a financial interest that could affect the
exercise of the adviser’s best judgment). Advisers and Financial Institutions would also be
required to “affirmatively warrant” that neither the Financial Institution, Affiliate, or Related
Entity “uses quotas, appraisals, performance or personnel actions, bonuses, contests, special
awards, differential compensation or other actions or incentives to the extent they would tend to
encourage individual Advisers to make recommendations that are not in the Best Interest of the
Retirement Investor.” (emphasis added)

While there is nothing in the Proposal or accompanying cost benefit analysis that suggests the
Department intended to preclude an insurance company from providing health and retirement
benefits to its career agents (or that the issue was even considered)", the text of the proposal,
without additional clarification, raises the specter of legal challenges that the provision of such
benefits based on the aggregate sale of company products violates the provisions of the Proposal
discussed above. This would be an unwarranted result since the tax code requires that retirement
benefits be based exclusively on the compensation received by the career agent for sales of the
sponsoring insurance company’s products.

So long as the legal obligations of the career agent to the insurance company and the benefits
provided to the agent are based on overall production for the company and not on specific
transactions in the retirement market, there is nothing in this structure inconsistent with the
objectives of the impartial conduct standards. And unlike the majority of the other forms of
compensation listed in BICE, in which there is an immediate and tangible benefit to the adviser
resulting from each specific transaction, the employee benefits earned by career agents do not
incent agents with respect to any particular transaction. Retirement benefits are unrealized until
some future date, and the value of welfare benefits are uncertain, depending on unpredictable
future events. These plan benefits are simply different in kind and should be treated as such.
Accordingly, there is no reason for the Department’s proposal to leave this issue in doubt.

Recommended Changes

To avoid any implication that the provision of benefits to career agents is incompatible with the
Proposal, we recommend the following:

1. As discussed in our comments above on the best interest standard, replace the “without
regard” language in BICE and PTE 84-24 with language that prohibits an adviser from
putting his or her interests ahead of the customer.

2. Revise section II(d)(4) of BICE to read as follows:

Neither the Financial Institution nor (to the best of its knowledge) any Affiliate or
Related Entity uses quotas, appraisals, performance or personnel actions, bonuses,

contests, special awards, differential compensation or other anal or incentives

te-th tent-th: id-tend-t idual Advi le

t yn ACOUFARE tL Ad

' ‘This would be an especially unfortunate result for a rule proposed by the federal department whose very mission
is to “assure work-related benefits and rights”. Department of Labor Mission Statement, available at
http://www.dol.gov/opa/aboutdol/mission.htm.

13


Section III. Refine and Expand PTE 84-24
Comment: Variable Annuities Should Remain Within the Scope of PTE 84-24.

We fully support the Department’s decision to continue to make PTE 84-24 available to fixed
annuities. We believe, however, that the Department should reverse its decision to exclude
variable annuities sold to IRA owners from PTE 84-24, which appears to be premised on the
belief that such contracts are principally in the nature of investment rather than insurance
products and therefore can successfully be accommodated under BICE. That is a significant
misperception.

Fundamentally, variable annuities include significant insurance features, similar and at times in
addition to those provided by fixed annuities. For example, variable annuity contracts routinely
include not only separate account options, but also access to a fixed account option, the return of
which is guaranteed by the insurance company. That is, these contracts are typically a
combination of fixed and variable options. Variable annuities may also offer “living benefits”
(insurance features that provide guaranteed accumulation, guaranteed income, or guaranteed
withdrawal benefits) and “enhanced death benefits” (insurance features that protect principal in
the event of the owner’s death). Living benefits and enhanced death benefits result in the
transfer of longevity and investment risk to the insurer. And perhaps most importantly, variable
annuities offer something no other security covered under BICE can offer — guaranteed lifetime
income through annuitization at guaranteed minimum rates.

The key insurance features of a variable annuity make it incompatible with BICE. This is
especially apparent with respect to BICE’s disclosure regime which is not designed to take into
account the current or potential value of a product’s guaranteed insurance features such as a
future income stream or death benefit. Simply put, PTE 84-24 is the logical exemption for
variable annuities for the same reasons that it remains the logical choice for fixed annuities. The
bifurcated approach of the Proposal draws an artificial line that would add unnecessary
complexity to the sales process when both types of annuities are being discussed. Moreover,
consolidating all types of annuities under PTE 84-24 will have no deleterious impact on investor
protection as a result of the incorporation of BICE’s impartial advice standard into that
exemption. Not only would advisers and financial institutions be held to the same standard of
care regardless of product-type, because variable annuities can only be sold by broker-dealers
and their registered representatives, investors would be able to assert any legal claims —
including claims relating to ERISA standards of care — through the FINRA arbitration process,
and class claims, not eligible for FINRA arbitration, could be asserted in civil litigation.'®

Recommended Change

Variable annuities should remain within the scope of PTE 84-24 as is the case today.

'© Additionally, under state insurance laws annuities carry “free-look” provisions extending for 10 days or more.
These provisions give clients a meaningful opportunity to evaluate purchases after the sale and to get their money
back for any reason.

16